Financing

What if I told you that there was a fairly easy, low risk, high-reward way to break into real estate investing?

What if I told you that you could buy a rental property with as little as 3.5% down, reap sizable tax benefits, lower your monthly rent expenses and do this with far less risk than your peers investing traditionally in rentals with 25% down?

It is called “house hacking”.

You may not have heard of this specific term before, but you’re probably familiar with the practice. House hacking is when you buy a multifamily property, live in one unit and rent out the other units. House hacking can be a great way to start buying rental properties because you can buy with low-money down owner occupant loans and still collect rent right away.

Different Ways to House Hack

Buy a multi-unit property and live in one of the units that isn’t rented

Rent out a room in your single-family house

Rent out your main home and live in the guesthouse

Rent out all the rooms in your home and live on the couch or in the garage

Rent out your place via Airbnb or HomeAway

Buy a fixer, improve it and sell it 2 years later avoiding capital gains tax

Due to high cost of living in Los Angeles I always recommend to my clients, who don’t own any properties yet, to buy a duplex. It’s the easiest,and in my opinion, the smartest way to break into real estate investing.

In theory this duplex could be purchased with 3.5% down payment as a FHA mortgage, but unfortunately due to debt to income ratios (DTI), this wasn’t possible in this case. At the end my client had to come up with $61K cash to close on this purchase. There was additional cost of $15K that had to be dedicated to relocation costs for one of the tenants. Both units are currently occupied and in order to move in, buyer of the property needs to evict for owner occupancy. Rent control in Los Angeles is brutal thing to new property owners / accidental landlords.

Tenants of the 2 bedroom unit received 60 days eviction notice. After they vacate, the new property owner will be able to move in. Total monthly payment of principal, interest, property tax and hazard insurance is about $2400/month. Considering that the tenants of the smaller unit will move out next year with the end of their lease, new property owner will be able to rent this unit out through AirBnB. Potential monthly income from vacation rental in this hot spot area is anywhere from $2400 to $3000. Which means this new happy homeowner will not only live rent free, but actually can make a small monthly profit.

On average house hunters visit 10 homes before finding their perfect match. For about 51 percent of buyers, it’ll take up to six months of searching before they find the home they’d like to purchase. These are national averages based on 2500 respondents.

In California, and particularly in Los Angeles, things move a little faster. For a serious buyer the average time frame is approx 2 months. It is very hard to say how many houses a buyer will see. Usually it only takes 3-4 showings for my buyer to make a decision on making an offer.

In national perspective 52 percent buyers believe they’ll find their dream home in their price range. However, 48 percent say that is impossible, and the majority of buyers realize they may have to settle for something less than perfect. With Los Angeles real estate being less than affordable, I’d say not more than quarter of buyers gets (almost) exactly what they want.

Home buyers surveyed describe a range of mixed feelings when house hunting. Here are their top six emotions:

Excited: 44% (all home buyers); 47% (first-time buyers)

Hopeful: 33% (all home buyers); 43% (first-time buyers)

Cautious: 32% (all home buyers); 26% (first-time buyers)

Optimistic: 28% (all home buyers); 26% (first-time buyers)

Happy: 26% (all home buyers); 37% (first-time buyers)

Anxious: 25% (all home buyers); 31% (first-time buyers)

They say their top concerns in the home-buying process are:

They’ll find something wrong with the house after they move in: 79%

Housing prices will drop after they purchase: 69%

Not being able to afford the mortgage: 61%

Some of the stress in the home-buying process can be relieved by getting pre-approved for a mortgage, the survey found. Ninety-eight percent of first-time home buyers say they believe the pre-approval process would take the worry of financing out of shopping for a home. However, only 13 percent of first-time buyers surveyed say they’re currently pre-approved for a mortgage.

I don’t know about the other markets but in LA real estate market, without pre-approval letter from a lender your offer will go nowhere. Getting pre-approved not only lets you know exactly how much house can you afford but makes your offer look serious. In today’s sellers’ market, if buyer finds “good deal” he/she will lose out as he/she won’t be able to get pre-approved in time. Just to give you an example… 2 months ago I saw a great deal in Silver Lake under $600K. There received multiple offers within the same day the property hit the market and over 20 offers after a week. Another one… Echo Park duplex at $575K… 4 offers the first week the property became available for sale.

If you’re serious about buying a property, let’s get you pre-approved for a loan today. It doesn’t cost you anything but a few minutes to gather documents. If you’re worried about lender running a credit check (as you should be), get a free credit report here www.annualcreditreport.com and have it handy for your lender. This way you’ll avoid a “ding” to your FICO score.

Call me today and let’s get you ready to start looking for your dream home!

Buyers still think that they need 20% down payment to qualify for conventional loan… Not true. Many lenders these days offer loans for borrowers who put only 5% down. This situation usually involves mortgage insurance, but if your FICO score is 680 or higher there may be possibility of avoiding PMI by paying a one time fee or getting slightly higher interest rate.

Getting pre-qualified for a loan takes a couple of minutes. But pre-approval will require careful examination of all the documents. That’s the only way for your loan officer to figure out how much house you can afford. Experienced loan originator can help you maximize your efforts by pointing out ways your loan application can look stronger. Are you worried about bad FICO or possibly not enough income or too low down payment? Make an appointment today and we’ll walk you through steps you need to take to qualify for a mortgage. Some things take time to fix but when you follow the plan we’ll get you pre-approved in no time.

Use this checklist to make sure you have everything you need before you begin your loan application. Having all necessary documentation up front saves time so your loan can close smoothly and quickly.

Completed form 1003 – Uniform Loan Application Form

2 years of tax returns

2 years of W-2s

If self-employed, 1099s and copy of business license

Explanation letter if there are any gaps in last 2 years of employment

Most recent (2 months) bank statements (all accounts and all pages)

Explanation (signed and dated) of any deposits over $1,000 other than normal pay into accounts

Most recent pay stubs (minimum of 30 days)

Copy of driver’s license

Copy of your social security card

Explanation (signed and dated) of any inquiries on credit report

Mortgage Statement, Insurance Declaration Page, and most recent tax statement for all other properties owned

Mortgage interest rates are important. But other terms of the loan can be even more important especially if you’re not planning on sticking with the mortgage loan forever. If you don’t have 20% down payment most probably in 2-3 years you’ll be refinancing and this will reset your mortgage rate anyway. And if you’re in California refinancing may be a good option sooner than you think! Personally I was able to refinance in less than a year as prices in Los Angeles skyrocketed this year.